From Startup to Exit: An Insider's Guide to Launching and Scaling Your Tech Business

By Shirish Nadkarni

Tech entrepreneurs, make your startup dreams come true by utilizing this invaluable, founder-to-founder guide to successfully navigating all phases of the tech startup journey.

With the advent of the internet, mobile computing, and now AI/Machine learning and cloud computing, the number of new startups has accelerated over the last decade across tech centers in Silicon Valley, Israel, India, and China. 

From Startup to Exit shares the knowledge that pioneering, serial entrepreneur Shirish Nadkarni has gained from over two decades of success, detailing the practical aspects of startup formation from founding, funding, management, and finding an exit. 

With successful tech entrepreneurs interviewed and featured throughout, From Startup to Exit will help you:

• Understand exactly what tech startups must do to succeed in all phases, from idea stage to IPO.
• Gain invaluable insights from the journeys of other successful tech founders that can be applied to your own situation.
• Learn how to raise millions of dollars of funding from angels and VCs to give your company the fuel it needs to take off and succeed.

• Language: English
• Publisher: Thomas Nelson
• Release date: Aug 24, 2021
• ISBN: 9781400225354

Shirish Nadkarni

Shirish Nadkarni is a serial entrepreneur with 20+ years of experience in creating consumer businesses that have scaled to tens of millions of users worldwide. He was the co-founder of Livemocha, the world’s largest language learning site with 15+ million registered members. Livemocha pioneered the concept of social language learning and was later acquired by RosettaStone. Prior to Livemocha, Shirish was the founder of TeamOn Systems, a mobile wireless e-mail pioneer that was acquired by Research in Motion in 2002. The TeamOn technology served as the core foundation for Blackberry Internet E-mail, which had over 50 million users at its peak.

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© 2021 Shirish Nadkarni

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Published by HarperCollins Leadership, an imprint of HarperCollins Focus LLC.

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ISBN 978-1-4002-2535-4 (eBook)

ISBN 978-1-4002-2534-7 (PBK)

Epub Edition June 2021 9781400225354

Library of Congress Control Number: 2021938402

Printed in the United States of America

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CONTENTS

Cover

Title Page

Copyright

Preface

PART I: IDEATION

1. How Good Is Your Idea?

The TeamOn Story

The Birth of Livemocha

What Makes a Great Startup Idea?

2. Achieving Product/Market Fit

Example of Great Product/Market Fit

What Does Product/Market Fit Look Like?

Initial Concept Testing

Narrow Customer Focus

Rapid Iteration and Testing

Focus on Engagement and Retention

Product Business Model Fit

3. Pivoting Your Startup

The TeamOn Pivot

When to Pivot

4. Are You Cut Out to Be an Entrepreneur?

Capacity to Take Financial Risks

Deep Customer Empathy and Product Orientation

Salesmanship

Perseverance and Mental Fortitude

PART II: COMPANY FORMATION

5. Company Incorporation

Form Your Company

S Corporation

LLC (Limited Liability Company)

C Corporation

Qualified Small Business Stock (QSBS)

How and Where to Incorporate

6. How to Split Founder Equity

Cash Investment

Employee Option Pool

Utilizing an Experienced Arbiter

Time Investment

Idea Development

CEO Role

Successful Entrepreneurs

Doing the Math

Vesting

83(b) Election

7. Fundamentals of Cap Tables

An Entrepreneur’s Journey

Seed Round

Series A Funding

8. Startup Options

ISOs Versus NSOs

409A Valuation of Shares

Establishing an Option Pool

PART III: FUNDRAISING

9. Early-Stage Funding Sources

Family and Friends

Angel Investors

Incubators

Accelerators

Venture Capital Seed Funds

Entrepreneur Journey

10. The Fundraising Process

11. Building a Compelling Investor Pitch

Storytelling

What Are Venture Capitalists Looking for in a Pitch?

12. Early-Stage Funding Vehicles

13. Convertible Note

Key Terms

The Hidden Traps of Convertible Notes

14. SAFE (Simple Agreement for Future Equity)

15. Series Seed Financing

16. Financial Provisions in a Term Sheet

Preferred Shares

Valuation Concepts

Size of Option Pool

Share Price Calculation

Liquidation Preference

Dividends

Redemption Rights

Conversion/Automatic Conversion

17. Control Provisions in a Term Sheet

Board of Directors

Protective Provisions

Information Rights

Registration Rights

Pro Rata Investment Rights

Drag-Along Rights

Right of First Refusal/Co-sale Right

18. Crowdfunding

Platform Selection

Setting Your Goal

Messaging

Rewards

Marketing and Public Relations

19. Venture Debt

Financing Terms

Covenants

PART IV: RUNNING YOUR COMPANY

20. Recruiting Great Employees

Start with a Great LinkedIn Profile

Hiring Through LinkedIn

Hire Great Leaders

Build the Founding Team

Build a Brand

Referral Bonuses

Job Postings

Tweeter in Chief

Interviewing Strategies

Interview Follow-Up

21. Creating a Vibrant Company Culture

Why Is Establishing a Company Culture Important?

Creating a Long-Term Vision

Developing Your Culture’s Value System

Reinforcing Your Culture

Operating in a Post-COVID World

22. Becoming a Great Leader

Communicating Your Vision and Strategy

Product-Centered but Multifaceted

Hiring and Firing Effectively

Keeping Your Company Afloat

23. Managing Your Board of Directors

Hiring and Firing the CEO

Approval of the Strategic Plan and Budget

Management and Employee Compensation

Partnerships, Fundraising, and M&A

Structuring Your Board Meetings

Your First Board Meeting

Standardizing Your Board Presentation

Communicating with Your Board

Logistics

Communicating with Your Team

24. Developing a Business Model

Advertising

Affiliate Marketing

E-commerce Model

Freemium Model

SaaS (Software as a Service) Model

Usage-Based Pricing

Transaction Fees

Lead Generation Model

Selling Data

25. Understanding Unit Economics

Customer Lifetime Value (LTV)

Customer Acquisition Cost (CAC)

26. Protecting Your Intellectual Property

Patents: The Provisional Application

Foreign Patents

27. Managing in Downturns

Assess and Secure Your Revenues

Reduce Expenses

Employee Layoffs

Secure Venture Debt for Your Company

Renegotiate Vendor Contracts

Be Flexible with Customers

Be Transparent with Employees

PART V: FINDING AN EXIT

28. Selling Your Company

The TeamOn Acquisition

Planning for an Acquisition

Hiring an Investment Bank

Managing Company-Wide Communications

Negotiating an Acquisition

29. Going Public

Pros and Cons of an IPO

Are You Ready to Go Public?

Are You an Emerging Growth Company (EGC)?

Preparing for an IPO

Preparing the Registration Statement

Managing the IPO Process

The Smartsheet IPO

Direct Listing

SPACs (Special Purpose Acquisition Companies)

Life as a Public Company

30. Inspiring Startup Stories

Icertis

Snowflake

OfferUp

Apptio

UlPath

Conclusion

Acknowledgments

Glossary of Terms

Appendix

Endnotes

Index

About the Author

PREFACE

IN 1999, WHEN I DECIDED to leave Microsoft to start my first company, TeamOn, it seemed like a daunting task. I had an idea for the company I wanted to build, but I had no cofounder. While I was in the middle of the dot-com boom, the internet was still immature and there were very few resources available to educate a first-time founder. I recall that I found a book that explained the venture capital ecosystem and the fundamentals of fundraising and term sheets. However, the book didn’t cover the basics of idea validation, achieving product/market fit, or how to develop a go-to-market strategy, all essential concepts to building a successful company.

I struggled to get the company off the ground initially. After many months of searching for a cofounder with the right technical expertise, I recruited my eventual cofounder, Shaibal Roy, in the San Francisco Bay Area. Shaibal was intrigued by my idea but was not willing to leave his company and relocate to Seattle where I was based. We finally agreed that he would work part-time on my startup until I successfully raised a Series A round. Fortunately, we were at the height of the dot-com bubble at that time, and I raised a $15 million round to fund the company. As you will read later in this book, the original idea didn’t work out, and I had to pivot the company before we found success through an eventual acquisition by BlackBerry.

It’s been twenty years since the start of my entrepreneurial journey. I am surprised that there have been very few good books written in the meantime covering a founder’s journey all the way from ideation to exit. Venture Deals,¹ a classic written by famed investor Brad Feld, explains the venture capital world and the details of fundraising and negotiating a term sheet. Hot Seat: The Startup CEO Guidebook,² written by Dan Shapiro, another Seattle-based serial entrepreneur, is a personal favorite. He details his learnings founding and running multiple startups. Still, as I advised many founders, I felt that founders could benefit from having a virtual seasoned advisor at their side who could guide them along the entire journey in all aspects of company building.

My initial venture in helping startup founders began with the founding of the TiE Entrepreneur Institute in Seattle in 2018. TiE is a global nonprofit focused on fostering entrepreneurship with more than sixty chapters all over the world. I have served as president of the TiE Seattle chapter and have been on the board for the last five years. The TiE Entrepreneur Institute was organized into three modules with fifteen different sessions covering a variety of topics, including company formation, ideation, fundraising, and go-to-market strategy. The sessions were conducted by experienced entrepreneurs, venture capitalists (VCs), and lawyers along with a fireside chat with successful entrepreneurs. The TiE Entrepreneur Institute was very well received and has now been conducted over Zoom for all TiE chapters around the world.

In 2019, to spread the word further, I started writing a series of blog articles on LinkedIn and Medium covering many of the same topics as the TiE Entrepreneur Institute. By happenstance that year, I met a former Microsoft colleague, Kumar Mehta, who is the author of The Innovation Biome. When Kumar heard of my blog articles, he encouraged me to convert them into a book. Coincidently at that time, HarperCollins had entered into a relationship with the Microsoft Alumni Network to publish books written by Microsoft alumni. I contacted HarperCollins and reached an agreement with them to publish this book under the Microsoft Alumni Network imprint. My vision for the book is to cover all aspects of an entrepreneur’s journey—from ideation, company formation, fundraising, and scaling the company to eventually achieving an exit.

The book is organized into five sections.

In "Part I: Ideation," I discuss what makes a good idea for a startup. I outline the strategic considerations to determine the viability of an idea. For example, a platform shift is an ideal time to disrupt incumbents, as companies like Amazon and Netflix have shown. I discuss the process for finding product/market fit and how to go about executing a pivot if your original idea is not getting traction.

In "Part II: Company Formation," I discuss the fundamentals of forming a company. I outline the various options, which include S corporation, LLC (limited liability company), and C corporation, and the pros and cons of each. I discuss the thorny issue of splitting up founder equity, which can be tricky given that each founder brings different capabilities and contributions to the table. Next, I explain the concept of cap (capitalization) tables and how the equity is split up among founders, investors, and employees. I provide an example of a financing to explain how the cap table changes as you go through various financing rounds. Finally, I explain the concept of startup options and the difference between incentive stock options (ISOs) and non-qualified stock options (NSOs).

In "Part III: Fundraising," I discuss the various sources for raising funding at different stages of your company. I outline different types of funding vehicles, such as convertible debt, SAFEs, Series Seed, venture debt, crowdfunding, and the pros and cons of each. I explain the meaning of various terms in a term sheet for raising a preferred round of equity financing. It is important that you understand all these terms in order to properly negotiate a term sheet with your VC investor. Finally, I discuss how to build a compelling investor pitch and provide you with a detailed outline for an investor presentation.

In "Part IV: Running Your Company," I discuss various aspects of growing and managing your company, including hiring great employees, building a vibrant company culture, and becoming a great leader. I outline different options to develop a sound business model for your company. I explain the core concepts of unit economics so you understand how to balance your cost of acquiring your customers against the lifetime value that you generate from them. Finally, given the major downturns that we experience every decade or so, this section outlines how CEOs should manage their companies through deep recessions and emerge in one piece at the end of it.

In "Part V: Finding an Exit," I describe the two options for finding an exit for your company—through an acquisition or through an IPO (initial public offering). I discuss how you should prepare your company for an acquisition even though you may not be looking for one in the short term. I explain the importance of hiring an investment bank so you can streamline the process for the acquisition and get multiple acquirers to the table. If you are one of the few companies lucky enough to get to an IPO, there’s a lot of preparation to be done. The book outlines the three ways that a company has to go public—to do a traditional IPO, to do a direct listing or to merge with a SPAC (Special Purpose Acquisition Company). The book explains in detail the preparatory work that needs to be done regardless of the option that you decide to pursue.

The journey from ideation to founding to an exit is a long and arduous one that very few entrepreneurs successfully make. The goal of this book is to be your guidebook through this journey, providing you with insights and tips to successfully navigate your way to a meaningful exit. I have shared many of the important lessons that I have learned through three different startups, raising more than $30 million in funding, and achieving two successful exits. It is the book that I wish I had when I started my first company twenty years ago. I hope that many of you who are aspiring entrepreneurs will be motivated to begin this journey. It doesn’t take a special breed to become successful entrepreneurs.

Good luck and all the best in building your business!

PART I

IDEATION

1

HOW GOOD IS YOUR IDEA?

The TeamOn Story

In 1997, at the height of the dot-com boom, I was put in charge of product planning for MSN.com (Microsoft Network). MSN was in a full-fledged transition from a proprietary online service like AOL to an open web-based portal called MSN.com. We were behind other leading portals such as Yahoo, Excite, and others. We were determined to catch up by leveraging Microsoft’s cash hoard to acquire companies offering essential internet-based services. One critical service we felt was important for us to provide was email.

In our research, we came across free web-based email services like Hotmail and RocketMail. While most people at that time got email through internet service providers (ISPs), Hotmail disrupted the market by offering a first-of-its-kind application as a web-based service. It was free and, unlike ISP email, it allowed you to access your email from any internet-connected computer with a simple web-based interface.

Hotmail was a simple but brilliant idea. After its launch in 1996, Hotmail started growing like a weed, adding more than one million users per month by 1997. It didn’t take us very long to decide that Microsoft needed to acquire Hotmail. The acquisition was expensive—almost $400 million—but well worth it as it drove significant growth for the MSN platform.

In the summer of 1998, after doing the initial work to integrate Hotmail into the MSN platform, I decided to take a sabbatical from Microsoft to contemplate my next move. We were in the middle of the dot-com boom as we had never seen before. Companies were raising $15 to $25 million in Series A funding with just beta products and no proof of market adoption. I had spent more than a decade at Microsoft and decided to try my luck at doing my own startup. I wanted to find out if I had the chops to make it on my own without the backing of a company like Microsoft.

Email was my passion. Even before the Hotmail acquisition, I was the product manager responsible for launching Microsoft Mail on the Mac and PC platforms in the early nineties. In the mid-nineties, Microsoft launched a client server solution for corporate email and scheduling called Microsoft Exchange. However, Microsoft Exchange was designed for large enterprises that could afford to hire system administrators to manage their server farm. It was much too complicated for small businesses that couldn’t afford their own IT staff.

Seeing the success of Hotmail, it dawned on me to offer an enterprise-grade email and scheduling service for small businesses that was completely web-based. Small businesses would no longer have to purchase servers, hire IT staff, back-up email, and deal with upgrades and bug fixes as they did with Microsoft Exchange. Our web-based service, which we named TeamOn, launched in 1999 and was one of the first SaaS (Software as a Service) solutions at that time. Salesforce, which popularized the term SaaS, launched that same year.

Like Hotmail, TeamOn was a good idea in concept. Unfortunately, it was ahead of its time when we launched the service. Although we signed up hundreds of thousands of users, usage was low and conversion to our paid offering was poor. Penetration of broadband internet access was low among small businesses, which made it challenging to use a web-based email solution. Users also didn’t care much about group calendaring/scheduling services as most people didn’t use a digital calendar at that time. Finally, the concept of Software as a Service was relatively new at that time, and most businesses were uncomfortable moving their corporate information to a public cloud. Almost a decade later, as broadband internet became ubiquitous and SaaS applications became more prevalent, Gmail and Office 365 would prove the need for a solution like TeamOn. With the failure of the original TeamOn concept, we were forced to pivot to a mobile email solution that eventually got significant traction. More on this a little later.

The Birth of Livemocha

Fast forward to 2005. I was traveling on vacation with my family. We had just landed in Spain late in the evening. We rented a car at the airport and headed to our hotel. Unfortunately, we didn’t have GPS in our rental car, and we had to rely on printed maps to navigate our way to the hotel. It was dark, and soon enough we got lost. We found our way to the closest gas station to ask for directions. Unfortunately, no one spoke English, and we couldn’t understand the directions that we were getting from the locals. I turned to my teenage kids for help as they had studied Spanish for several years in school. Alas, all I got were blank stares—I discovered that they had almost no conversational abilities in Spanish. Fortunately, an English-speaking person soon pulled up to the gas station, and we finally got the directions we needed. This incident reinforced in my mind the importance of conversational practice to properly learn a language.

The following year, one of my cofounders, Raghav Kher, noticed for the first time kiosks at the airport with bright yellow boxes promoting language learning through a CD-ROM-based software package called Rosetta Stone. Rosetta Stone promised that you could learn a language just like a child by simply watching a series of pictures with audio and text in a foreign language. Rosetta Stone invested heavily in marketing not just with kiosks but also with expensive TV advertising. Raghav purchased a copy of Rosetta Stone to learn Spanish but was struck by the fact that, in the day and age of broadband internet, Rosetta Stone was still selling CD-ROM-based software. It occurred to him that there might be a real opportunity to disrupt Rosetta Stone with an internet-based learning solution.

Growing up in India, I learned six different languages, including English. I knew that the only way to really pick up a new language was through intense conversational practice with native language speakers. This is the reason that my kids had not developed any conversational proficiency in Spanish. The textbook-focused approach that they took in school didn’t provide them with enough conversational practice to become proficient. I was excited by Raghav’s insight and agreed that the time was ripe to introduce a whole new approach to language learning that combined language instruction with the ability to practice conversational skills with native speakers. Globalization was happening rapidly, creating the demand to learn English all over the world. Not only was internet penetration increasing rapidly, but more and more internet users were gaining broadband access, enabling the delivery of high-quality learning content. Finally, Facebook was gaining increasing popularity, making it possible to create private social networks or communities based on common interests like language learning.

Raghav, Krishnan Seshadrinathan, and I decided to take the plunge into language learning, and Livemocha was launched in September 2007. Our vision was to provide language instruction combined with a social network of native speakers that would help learners develop conversational language proficiency. Each language learner was both student and teacher. A native English speaker learning Spanish could help a Chinese-language learner speak English. In turn, the native English speaker would get help learning Spanish from a native Spanish speaker from Latin America. Livemocha took off like a rocket because people loved the idea of seeking help from native speakers. We had a hundred thousand registered users in three months and a million within a year. Over the next four years, Livemocha grew rapidly to more than 15 million registered users in more than two hundred countries before being acquired by Rosetta Stone in 2012.

Unlike TeamOn, Livemocha addressed the real and immediate need of people all around the world to learn English. English-language proficiency can make a world of difference to people’s lives, giving them access, among other things, to better paying jobs. Livemocha, in particular, was successful because users were looking for a solution that gave them access to native speakers, which they knew was essential to developing proper conversational proficiency.

What Makes a Great Startup Idea?

You think you have come up with a brilliant idea for your startup. You have spoken to your friends and colleagues, and they think that the idea has merit. You have even done the preliminary market research and spoken to many potential customers, and feedback has been positive. But how do you really know that it will form the basis for a great company? Figuring this out is no easy task. After all, VCs are paid millions of dollars in management fees, and even then, for the most successful investors, only one out of ten picks is a major hit. To consider whether a startup idea has the potential to become a hit, it is important to consider the idea from a number of different strategic perspectives discussed below.

INCUMBENTS ARE HARD TO BEAT ON THEIR OWN TURF

Most markets you will target have existing players and market leaders that have been around for years. Incumbents are